Are Your Largest Spending Commitments Keeping You in a Cage of Insecurity?
It doesn’t matter what life stage you are living in, the temptation for “more” is always there. It’s one of the things that makes us human. However, whether you are committing to your first home, raising kids in a juggle of high stress careers, looking at colleges, or planning your retirement transition, your biggest financial commitments can be the items in life that keep you from what you truly want- freedom and security. The larger the commitment, the tighter the rope is that’s holding you back. Here are a few of the big items we see people get “stuck” with and our thoughts on each:
Your Home: Inevitably, this is where you spend most of your time (especially for those of you now working from home these days). Low interest rates allow people to afford bigger homes than ever. But mortgages, increasing property taxes and insurance (due to increased home values) and maintenance can be a killer on your cash flow. The best way to evaluate if you are over housed is to look at your total home expenses as a part of your cash flow as a percentage. The older you are, the smaller this percentage should be. Ideally, even in your younger years, it should not be more than 20% of your income (less if you have aggressive savings goals).
Remodeling Projects: EVERYONE seems to be doing this now! With interest rates low, large remodels look attractive and justified. We ask people to think about this as a percentage of their housing, but also as an alternative. Would you rather remodel the kitchen, or know your kid’s college fund is covered? Is it worth working an extra couple of years? Think about those tradeoffs as you make decisions.
Second (or Third) Homes: It’s tempting to get that lake house, or the place on the beach or in the mountains. But unless you are keeping it rented most of the time, it’s going to be a pure consumption expense. And it can be a BIG one in relation to how much you get out of it. If you will spend half of your time there (or even a third of your time) and it falls in that 20% housing expense, then by all means consider it. But if not, really think about what you are committing to, and the tradeoff of other vacations, your time and energy keeping the place up, and other things you may want more.
College: There is SO much research that backs up the fact that college educated people earn more in their lifetime on average than people without college degrees. However, paying any amount for any college for any career track is not always a good use of money, especially when you don’t have money to burn. And yet, we see people regularly commit to college funding with no clear plan or purpose for choosing the high end, name brand school. The worst part of this is that this choice can strap the kids with loans which last a lifetime before they ever understand money matters at all. Be very careful here not to get swept up in the romance of college memories to be had.
Cars, Boats, Horses, Campers, Art, Collections…and the list goes on: One-time purchases- no problem. But see these items as what they are- a lifestyle choice, not an investment. The more you have, the more you have to maintain and insure. The more frequent and increased expense of each of these will help create a false sense of wealth instead of the kind of assets that generate income and growth for you long-term. Money is absolutely to be enjoyed, but too much of these things may turn you into Veruca Salt.
The Big Life is easy to commit to, but freedom and security long-term take time and resources to build. Your income over your lifetime is your biggest opportunity to build true assets that can provide for you when you no longer can or want to work anymore. And that time comes upon you fast. Be sure that you don’t over commit to big, long term ticket items that keep you from that freedom.